I never expected Marks & Spencer (LSE: MKS) shares to recover as dramatically as they have. In fact, I didn’t think they’d recover at all. While its food stores were fab, clothing and general merchandise seemed lost somewhere in the 1970s, doomed never to return to the present day.
The company’s legacy store estate was visibly jaded, battered by online competition and expensive to maintain. Like many, I was saddened to see this British high street giant drop out of the FTSE 100, but not exactly surprised. Then I stopped thinking about it. Next thing I knew, its shares were back in style and I was the one looking out of touch.
FTSE 100 comeback kid
New CEO Stuart Machin, appointed in May 2022, has somehow succeeded where so many predecessors had failed.
He took tough decisions such as closing tired high street stores and shifting to smaller, snappier shops in retail parks with handy click-and-collect services.
The group’s last set of annual results, which covered the 12 months to April 2023, showed clothing and home sales up 11.5%, and food sales up 8.7%. That’s particularly impressive given the cost-of-living crisis.
As a rule, I prefer to buy beaten-down stocks before they recover, rather than afterwards. So while I admired M&S’s new-found purpose, I was wary of buying its shares, which had jumped 70% in the 12 months before it rejoined the blue-chip index on 18 September 2023.
They opened that day at 222.5p. If I’d invested £5,000 I would have had fun for a while. The share price continued to rally, peaking at 290.5p on 8 January, a rise of more than 30%. That would have increased my £5k by £1,528, giving me £6,528.
The stock has since crashed almost 18% to today’s share price of 239p, which would have reduced my £5k to £5,370. I wouldn’t have received any dividends in that time, because currently M&S still doesn’t pay one.
A buying opportunity?
Marks had a solid Christmas, with sales rising 8.1%, but warned of rising wage and business rates-related cost inflation. The real damage has been done by the fallout from its ill-fated 2019 tie-up with Ocado Group.
M&S is withholding a £190.7m final payment after their Ocado Retail grocery delivery venture missed key performance targets. Now the two are locked in talks over how much M&S should pay, if anything.
As this seems to be Ocado’s bad, it could be an opportunity to snap up M&S shares at today’s reduced price. They look reasonable value with a forward price-to-earnings ratio of just 10.9 times for 2024. Dividends should resume in 2024, with a forecast yield of 1.26% rising to 2.51% in 2025, although this isn’t guaranteed.
The group has to shoulder more costs, including investing £30m in its Scottish stores, and spending £89m lifting staff onto the Real Living Wage of £12 per hour. However, it may get a boost if inflation eases, interest rates fall and shoppers feel better off.
I expect M&S shares to hold their own but I’m not expecting a repeat of their recent resurgence. That ship has sailed. Instead of buying them, I’ll look for the next recovery play instead. Let’s hope I’m not too late this time.
